Are retrospective dividends possible?
Are retrospective dividends possible?
You sometimes take money from your company aside from regular salary and dividends. As a result, your director's loan account was in the red at the end of the last financial year. Can you treat the extra cash you took as dividends?
Dividends are best (probably)
Generally, the most tax-efficient way to take money from your company is as dividends. There are exceptions, e.g. if your total income for a tax year is less than your tax-free allowances and reliefs, however dividends would be planned to, even if you're on short notice.
Trap. Dipping into your company's bank account to meet personal expenses without first declaring a corresponding dividend can lead to unexpected tax bills.
Loan or taxable income
At one time tax inspectors routinely demanded PAYE tax, and employers and employees' NI contributions, on the money owner managers took for personal reasons. HMRC argued that the drawings were in effect extra salary. On top of this, HMRC heaped interest and penalties where the PAYE tax etc. hadn't been paid or was paid late.
Tip. These days, HMRC usually (but not always) accepts that drawings not specifically earmarked as salary or dividends are loans. The tax position for these is initially benign.
S.455 charge
The tax regime for loans by a company to its owner managers stops being benign if all or part of the debt is outstanding after nine months following the end of the company's accounting period in which the debt arose. As you probably know, in that case the company must pay tax equal to 33.75% of the debt. This is known as a s.455 charge. While it's refundable, it means the company is out of pocket for at least a year and typically much longer.
Trap. In addition to the s.455 charge, if the amount the owner manager owes their company exceeds £10,000 at any point in a tax year, it counts as a taxable benefit in kind.
Old style solution - rewrite history
In the bad old days it was common practice for company owner managers, once they're savvy to pay money accounted for to retrospectively re-categorise money borrowed as a dividend in an attempt to erase the debt and tax consequences prospectively. While this dodgy practice is sometimes ignored, HMRC is now far more alert to it and will attack it.
Trap. The nature of a transaction cannot be changed retrospectively. You can't rewrite history if you later realise it would be more tax efficient to treat personal drawings as a dividend. This principle was confirmed by the court in Richard and Julie Jones v HMRC (2014).
New style solution - late not never
While you can't rewrite history to improve your tax position you can do the next best thing, which is for the company to declare a dividend as soon as it's convenient to and allocate it to clear some or all of the debt rather than pay it to your bank account.
Tip. Declare a dividend at a time to prevent your debt to the company exceeding £10,000. That way you can avoid the s.455 charge for the company and the benefit in kind tax.
Tip. Don't let your director's loan account go into the red unchecked. Keep an eye on it, or get your bookkeeper to do it. When it approaches the danger zone consider clearing it with a dividend.
You can't change the nature of a past transaction for any reason, let alone to improve your tax position. To stay tax efficient keep a close eye on your director's loan account and if it approaches £10,000 overdrawn consider declaring a dividend to reduce or clear the debt. This prevents tax charges arising for you and your company.